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Head of prudential supervision & self proclaimed arborist Toby Fiennes says RBNZ may add bank conduct metrics & individual bank stress test results to its Dashboard

Banking
Head of prudential supervision & self proclaimed arborist Toby Fiennes says RBNZ may add bank conduct metrics & individual bank stress test results to its Dashboard

The Reserve Bank is seeking ideas for bank conduct metrics that could be included in its Bank Financial Strength Dashboard.

Toby Fiennes, the Reserve Bank's Head of Prudential Supervision, outlined this in a speech delivered to Chartered Accountants Australia and New Zealand entitled Enriching disclosures: The Bank Financial Strength Dashboard. The Dashboard is an interactive online tool allowing users to compare banks’ disclosure and financial strength information.

Should the Reserve Bank push ahead and add conduct metrics to the Dashboard, this could be viewed as a controversial move. The Reserve Bank's annual report, issued on Tuesday, noted "conduct concerns are formally within the remit of the FMA [Financial Markets Authority]" rather than the Reserve Bank. However, the Reserve Bank also argues poor conduct can be symptomatic of governance problems and can adversely affect confidence in the NZ financial system, and that it has a prudential responsibility to understand how bank boards and senior management satisfy themselves when signing off on attestations to the Reserve Bank.

Individual bank stress test results may go public, insurance Dashboard planned

Fiennes also hinted that the Reserve Bank may also make individual bank stress test results public, something some overseas regulators do, and has been advocated by Victoria University's Martien Lubberink. Additionally Fiennes reiterated disclosure dashboards for the insurance and non-bank deposit taker sectors are on the cards, with insurance likely to be the next cab off the rank with work beginning "in earnest in mid-2019."

"A challenge I want to throw to the banks themselves, to their customers and to commentators is to tell us what else you want to see in the Dashboard and how this can be presented," Fiennes said.

"It is arguable that society now expects more than compliance with the bare regulatory minimum. To be clear, we have no ability to take action against regulated entities that operate above regulatory minima and nor should we. But we may have a role in facilitating disclosure: for example in the wake of the recent Australian Financial Services Royal Commission’s interim report, there is much focus on misconduct and fair treatment of customers. We would welcome ideas on whether there are 'conduct' metrics that could and should be included. The same question arises in the context of operational risk, such as business continuity arrangements. What, for example, would be a minimum or standard benchmark and how should one define and source the information?"

"These ideas, along with that of presenting stress test results, are qualitatively different from the current role of the Dashboard, which is to present well-understood, consistently-defined information in a single place. That is why it is both exciting and challenging to be thinking about the next stage of evolution of a tool that has, in a few short months already exceeded my high expectations. I welcome ideas – bring them on!" Fiennes said.

He said the Reserve Bank has experienced good engagement from academics, rating agencies and financial journalists over the Dashboard.

"Some have asked for less static data, and for us to introduce scenario analysis. For example, stress test results may contain useful information for the riskiness of individual banks. We plan to review the case for making individual bank results publicly available alongside the next stress test, building on the steps we have already taken to increase the granularity of stress test reporting," said Fiennes.

"The Reserve Bank is keen to explore disclosure dashboards for other sectors like insurance and non-bank deposit takers. Insurance is likely to be the next cab off the rank and we expect to start work in earnest in mid-2019, once we have a good sense of how the bank Dashboard has worked. We are excited about this, seeing an insurance dashboard as a great opportunity to further improve transparency of the sector and of our supervision of insurers."

APIs & arborists

He said a public Application Programme Interface (API) to allow more flexible and efficient use of disclosure data is on the cards. Fiennes also said "genuine positive changes" have resulted from the Dashboard's launch. An example he cited is banks improving the scrutiny they apply to their own liquidity metrics now that these are in the public domain.

"We have also seen commentator interest in some of the detail, such as rural exposure or concentration risk. Financial journalists have used Dashboard information to compare capital and liquidity ratios across the banking sector, and discuss their meaning. Independent rating agencies advise that they actively use the Dashboard in their assessments. These are all positive and encouraging developments. Of course, we are always looking for ways to improve both the content and the use of the tool," said Fiennes.

"We have also begun an initial exploration into how market discipline operates in our financial ecosystem. This study, to be released later in the year, will be the first of its kind for New Zealand and we hope to lay the foundations for further investigation of market discipline. Although not yet complete, our study does provide evidence that market discipline does indeed work to reduce financial risk in our garden but that there is room for improvement."

The "garden" reference follows on from a recent article published by the Reserve Bank that said; "The Reserve Bank became the Tāne Mahuta of New Zealand’s financial system, allowing the sun to shine in on the economy." Fiennes noted a te reo Māori version of the Dashboard is planned.

"Last week, we unveiled a colourful new analogy to help tell the story of the Reserve Bank of New Zealand and the important work that it does to nurture the financial system and contribute to a well-functioning economy," Fiennes said.

"In this analogy, the Reserve Bank, or Te Pūtea Matua, is the big tree, Tāne Mahuta, that sits at the centre of New Zealand’s financial ecosystem. In Māori legend, Tāne Mahuta – the god of the forest and birds – separated Papatūāanuku, earth mother, and Ranginui, sky father, to let the sun shine and life flourish in Tāne’s garden."

"In our context, Tāne Mahuta is the various elements that work together to deliver a sound and efficient financial system, and Tāne Mahuta’s garden represents the wider economy. Tāne’s roots are its legislation. Tāne’s trunk is the payment and settlement systems that allows the sapor money, to flow throughout the system. The branches are regulated financial institutions, like banks, grafted onto Tāne for their legitimacy and lifeblood – access to money. The people working at the Reserve Bank are Tāne’s kaitiaki, its caretakers," Fiennes added.

"Today I’d like to talk about the important work that the Reserve Bank’s arborists do to take care of Tāne’s branches. That’s the Prudential Supervision Department that oversees regulated financial institutions to promote a sound and efficient financial system. Under our long-standing analogy, the Reserve Bank takes a ‘three pillar’ approach to prudential supervision. The pillars are: regulatory discipline, self-discipline and market discipline. In our new story we could think of these elements as the tools that Tāne’s arborists use in their work to promote a sound and efficient financial system."

'Better informed investors'

When launching the Dashboard earlier this year Fiennes said the Reserve Bank's aim was for the Dashboard to make it easier for people, including bank depositors, to assess the financial stability of banks by improving the disclosure and accessibility of key financial information. The Dashboard should provide greater transparency about banks' financial health and performance, making for better informed investors who will help promote a sound and efficient financial system, he said.

The Dashboard allows users to make "side-by-side comparisons of banks in an apples-with-apples scenario" on seven key subject areas. The seven are credit ratings, capital adequacy, asset quality, profitability, the balance sheet, liquidity, and credit concentrations. The introduction of the Dashboard from late May means banks now only have to publish disclosure statements twice yearly instead of quarterly. Dashboard content comes from banks' private reporting to the Reserve Bank.

*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.

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20 Comments

A Tane Mahuta analogy? Yep! That'll fix everything....
I reckon a Jack and the Beanstalk one might work better. At least that one has magic at its core.....

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Hakuna Matata. The new RBNZ mandate? Let the FMA worry about the regulations.

https://www.youtube.com/watch?v=nbY_aP-alkw

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Have you read Bob Jones' book "Prosperity Denied"?

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No i haven't, I will look it up. Thanks

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The Australian Banks have gone from 'nothing to see here' in April to 'downgrade' by August and yet in NZ we are still mucking around pruning trees. I think it's time that the RBNZ got a handle on things and rather than wasting time with the 're-positioning' consultants who are dreaming up fancy flora and fauna stories.

"Today I’d like to talk about the important work that the Reserve Bank’s arborists do to take care of Tāne’s branches. That’s the Prudential Supervision Department that oversees regulated financial institutions to promote a sound and efficient financial system. Under our long-standing analogy, the Reserve Bank takes a ‘three pillar’ approach to prudential supervision. The pillars are: regulatory discipline, self-discipline and market discipline. In our new story we could think of these elements as the tools that Tāne’s arborists use in their work to promote a sound and efficient financial system."

This statement is not entirely true is it as the responsibility for investigating the banks has been palmed off on the FMA. When do we get to hear more about how these investigations are going or are we just going to sweep it under the carpet with a rating from Moody's that says no problem, nothing to see here..

https://www.youtube.com/watch?v=_aJ69YgvpDo

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Jim Rickards

When you "grow" with debt, you move closer to a debt crisis. That's the essence of non-sustainability.

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Occupy wisdom

"QuantitativeEasing, the global effort to print currency from thin air and purchase assets, bonds and other debt, is UNPRECEDENTED - and therefore unpredictable.

This was a unidirectional experiment designed to suppress interest rates and yields so that money flowed from certain assets, & into others. The assets that money flowed into were risky, but nobody knows HOW RISKY because (1) there is no historical precedent & (2) ALL RISK ASSETS ARE PRICED IN THE DEBT MARKET, and that market is being manipulated buy suppression yields.
All asset prices are derived from the 10 year (“benchmark”) US #treasury yield.

If that yield is suppressed, all asset prices are DEFORMED. ALL RISK IS DEFORMED. It creates mal-investment (think unprofitable IPOs and zombie corporations). deformed asset prices -> unknown risk -> no price discovery.

This went on for a decade. There is no real plan to reverse it. The monetary system is a DYNAMIC, COMPLEX, EMERGENT SYSTEM.

Something that is unidirectional, cannot be reversed with predictable outcomes.
QE re-inflated the housing bubbel, the stockmarket and has created many distortions where easy money has flowed into places it shouldn’t.

When bubbles are inflated the average person feels good. They borrow more than they should - consumer debt and margin debt are at record highs again. The behavior, euphoria and news all mirror 1929, 2000, 2007. It’s all the same attitudes. Inflated housing prices and stock portfolios have created an environment that is all based on an experiment, not fundamentals.

Everyone is fixated on the $DJIA
this is 30 COMPANIES. Look at the NYSE composite. Look at the broad market. Look at the debt market.

The looming issue in the debt/ bond market is the possibility that bonds and stocks sell off in unison.

Bonds sell off -> yields spike -> stocks sell off -> housing deflates

Can the CBs come in and attempt to buy the debt sell off? They can try, but not without risking the confidence in the currency.

A rapid bond sell off is not only unstoppable, it is inevitable.

This type of collapse is just the free market trying to return a manipulation to fair value."

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President Trump Misses What's Really Missing from Monetary Policy
https://www.realclearmarkets.com/articles/2018/10/05/president_trump_mi…

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Regarding the dashboard, It would be nice to stratify the bank loan books by different criteria, like the district they're in, and/or how long ago they were issued. ie what % of the loan book is > 95% LVR? (okay we can already do that), What % of the loan book is Auckland real estate? What % of the loan book was created in the last 3 years?

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Could be some sort of audit results if they did a really deep dive on what was happening at the coal face? The again we've see how reluctant to RBNZ have been to press banks on their service and customer management.

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I'd prefer if they spared us the animist gibberish. How I really get to its absurdity is by thinking how stupid it would sound if they started saying that the Reserve Bank was the Abraham or Jesus of the financial system. You can fill in the rest.

Anyway, given the OBR regime in place and the lack of deposit guarantees, the more transparency we have around individual banks the better.

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These weirdos should also do some reading about how the Earth and sky gods were actually separated in maori mythology. Not quite as child friendly, but basically Ranginui's genitals were cut off and chucked in the sea by Tane Mahuta (presumably from their prior state of permanent penetration).

This would equate Adrian Orr with Lorena Bobbitt or that German guy.

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My latest project is to prepare a short paper giving feedback to the RB,as they have requested. partly,this will reflect the feedback I get from others,such as our share group,the local NZ Shareholders' Assoc. and hopefully,the local U3A.
I start from the assumption based on what I have found to date,which is that few know of the Dashboard's existence,though that should change over time. I have spent some time looking at it and the over 100 metrics it encompasses and I seriously doubt if most depositors could use it to make an informed decision on the relative strengths of our banks.
I would be interested to hear what others think.

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It's like something from an Alex cartoon. To combat bad bank behaviour, a RBNZ dashboard is introduced to compare and measure banks' conduct. To look good on that dashboard, the bank need to incentivise their most ethical people with bonuses.

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An interesting metric would be what percentage of remuneration is paid as a bonus... then stratify it by division.... sales/trading/mgmt./back office/risk mgmt. etc.

Personally I don't think any retail client facing staff should be on a bonus at all.... your job is there to provide advice and service that meets your customers needs. Give them all a 10% pay rise and cancel bonuses. That'll address a lot of the conflicted advice.

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Who regulates the RBNZ? No one it seems. An 86% reduction in the purchasing power of the NZD against the average NZ house since 1992 seems like systemic failure on a grand scale. Yet 2% inflation is intoned by the priests as a Good Thing. Methinks the RBNZ try hard but something is seriously wonky somewhere in their thought process and they don't seem to want to face it. Plenty of money for bidding up house prices, but that is just destruction of purchasing power on a grand scale.

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Do they understand they have merely fueled the negative effects of finance capitalism and consequently destroyed our productive potential and social cohesion? That they have sponsored wealth transfer and reduced wealth production? Sort of Argentina Light policy by intelligent and well meaning fools.

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No...and no...and 'yes' to the last statement!

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